No automatic exchange of information through the back door

16.05.2012 (All day)

The discussions at the ECOFIN meeting of EU finance ministers in Brussels were very difficult. The 27 countries did not reach an agreement on giving a mandate to the European Commission to open negotiations with so-called third countries on the taxation on savings income. Luxembourg and Austria said no to this mandate. At a press conference, Luxembourg’s finance minister, Luc Frieden, explained his country’s position.

The EU-Commission wants a mandate from the finance ministers to open negotiations with third countries like Switzerland, Liechtenstein, San Marino, Monaco and Andorra to extend the savings directive to them. Luxembourg and Austria did not give their approval to the Commission because both countries have the impression that it will be misused to introduce the automatic exchange of information through the back door.

Finance Minister Luc Frieden explained the motivation behind his decision like this: “I am not giving someone the authorisation to speak in my name without knowing what the topic of these discussions will be. It was also said that we need to adapt the European taxation system so that it takes into account the latest trends. The problem is that I did not get an answer from my finance minister colleagues when I asked what these international tendencies would look like".

"Anyway, I don’t agree with the EU-Commission saying that the current trend is towards the automatic exchange of information”. He agreed that this was indeed the position of many countries in 2003, but circumstances and trends have changed since then. According to Minister Frieden, several models coexist today.

“The G-20, for instance, didn’t retain the automatic exchange of information as an international standard. The OECD, for its part, has foreseen the exchange of information on demand. Recently, Germany and the UK have signed agreements with Switzerland which do not foresee the automatic exchange of information, but a withholding tax system. It is interesting to note that in 2003 Germany and the UK were both advocates for the automatic exchange of information and today they are signing something completely different”.

Mr Frieden completes his series of arguments by adding that since 2003, 20 out of 27 member states of the European Union have introduced internal withholding tax systems. He thus demonstrated to the press that there is not one trend, as the Commission affirms, but several ones coexisting simultaneously.

Falling on deaf ears

Luc Frieden deplored that the EU-Commission has stuck to its position, though he did make a compromise proposal. He suggested opening discussions with third countries and to extend the scope of the directive to other products. His proposal fell on deaf ears. “If all the countries want to introduce the automatic exchange of information, third countries included, we will do the same. It is not that Luxembourg is blocking this dossier".

"Luxembourg does want to open discussions on what is the best system for Europe in order to achieve two goals: to guarantee the free circulation of capital and to achieve the most efficient taxation of savings income.” He made it clear that this discussion had nothing to do with tax evasion or hidden black money and at the same time he deeply regretted that European countries are unable to debate on what is the most efficient system to tax savings income.

Attack on TV

There was another topic touched upon at the press conference. Recently, two reports on French and British television have attacked the Luxembourg financial centre. The one in France was an attack against the structuring of investments, one of the five pillars of the Luxembourg financial centre. The other attack, which aired on the BBC, was against the private banking industry, another one of the five pillars, as Minister Frieden resumed.

“The report on French television was much worse than the one on the BBC. The French program was extremely tendentious, dishonest and full of myths and clichés about Luxembourg. The questions from the journalist were very leading, so the goal of the report was not to inform the audience but to strengthen the clichés that exist in France about Luxembourg”.

The objective of the report was basically to explain how multinational companies are being taxed. Minister Frieden underlined that these companies organise their financial flows in such a way that they are subject to taxation in the country that offers the most favourable environment for taxes and economic development. These firms discuss their situation with the tax administration while respecting the Luxembourg tax laws.

“This practice is of course legal; it conforms to European tax laws and to international agreements between tax administrations. This report shows a lack of knowledge and analysis of our economy and its companies, both of which are global. I would like to point out that there are other European countries that have similar or even more attractive tax regimes than ours. Countries like the Netherlands, Ireland and the UK have very interesting yet legal vehicles to structure international investments".

He expresses that this report is all the more regrettable because Luxembourg not only has very tight relations with the French government, but it has also signed a double-tax treaty with France. He closed by saying that, “Luxembourg does not accept to be treated as a country that is living at the expense of others, and certainly not when it is operating in compliance with European laws and international agreements”. CW